Now that I can keep the bike running in gear, I can't get it out of gear. The scenario goes like this: the bike is the neutral, I started it up, pull in the clutch lever and drop it into first gear (there is quite big loud clank/bang), and the rear wheel spins. Then, when I pull in the clutch lever the bike remains in gear with the rear wheel spinning.

I have started the bike in first gear, second gear and fifth gear and the results are identical. The loud clang/bang I get is shifting into gear while the while the clutch is engaged.

I have adjusted the slack in the clutch cable. I followed the Clymer's manual and made the clutch adjustment under the clutch cover, and nothing has changed. Keeping in mind this bike sat for 10 years, I am wondering if the clutch is seized or something is amiss in the clutch. Maybe the PO "squeezed the clutch lever and the steel balls in the adjuster housing were dislocated" as per Clymer's manual caution on page 40.

Or maybe the clutch plates are just all seized up and I need to take the clutch apart to get them apart. Any advice or ideas before I start the tear down.

If the bike/motor has sat for a long while, this is pretty typical. As a worst case, you may need to disassmble the clutch and re-oil everything. But before you go there, try this; start the bike on the centerstand, and put it into gear. With the clutch still pulled in, step on the rear brake. This may kill the motor (give a bit of throttle), but repeat at least 6-8 times or until the clutch 'breaks loose'. Once it's loose, oil will work it's way back in and you should be good to go.

I had the same problem on my SG, and after I got it freed up, it's working fine...

One thing to give a quick try to and see if you can break if free (probably won't work but it's worth a try) is (ok, this is two things) to get it in gear, then with the clutch lever pulled in and making sure your giving it some gas to keep it from dying, press firmly on the rear brake pedal (trying to stop it), this MIGHT break the clutch plates free (they are very likely just stuck together after sitting this long). The other thing to try is similar, but you need to have it in neutral, and while holding the rear brake on FIRMLY, drop it into first gear.

This may well not work, but it's work a try and it might work, and hey, it's an easy thing to try as well, just make sure the rear wheel is off the ground when you do this. There are some other things I'm sure others will suggest as well that have a chance at working, but all of them work on the same principle, which is to try and force/shock the plates into releasing from each other. Otherwise your talking about taking the clutch pack apart, and if you get that far, you may as well put new springs in while you in there, cheap to do and good insurance against slipping.

The "run the engine in gear while holding it the clutch and repeatedly applying the rear brake" worked!!! When I let the clutch out the rear wheel still spins but the slightest pressure on the brake stops it. I am sure the clutch will completely free up with a little use.

A guy that raced Brit bikes taught me how he unstuck his plates every time before starting the bike. With the bike in first and the clutch lever pulled in, get the bike rolling and dump the clutch, with the motor off. This shocks the clutch enough so it doesn't clunk when ya put it in gear.

After some regular riding the clutch will loosen up but a good cleaning of the fibers and steels wouldn't hurt.